This bill prescribes a statutory framework insurers must use to compute minimum nonforfeiture amounts for annuity contracts. It defines the components that feed into a guaranteed paid‑up value, the set of permissible deductions, how consideration is measured, and how interest assumptions are set and adjusted.
The measure affects product design, reserve calculations, and the valuation of equity‑indexed benefits by tying the interest assumption to a Treasury benchmark while giving the insurance commissioner authority to require demonstrations and adopt implementing regulations. That combination creates clearer guardrails for consumer guarantees and operational requirements for insurers and regulators.
At a Glance
What It Does
Creates a step‑by‑step statutory formula to calculate the minimum nonforfeiture amount for annuity contracts, specifying which premium credits count, what items insurers may subtract, and how interest is applied and reset. It also allows an additional adjustment for equity‑indexed features subject to regulator review.
Who It Affects
State‑licensed life insurers that issue annuities (including equity‑indexed products), product managers and pricing actuaries who design and reserve these contracts, and the California Department of Insurance responsible for oversight and rulemaking.
Why It Matters
By standardizing the nonforfeiture computation and tying interest to a public benchmark with defined limits, the bill reduces uncertainty about guaranteed values, influences how insurers price and reserve annuities, and creates a structured path for recognizing the cost/value of indexed benefits.
More articles like this one.
A weekly email with all the latest developments on this topic.
What This Bill Actually Does
The bill fixes a legal baseline for how insurers must calculate the minimum value a policyholder can claim if an annuity is converted to a paid‑up contract, surrendered, or upon death. It does this by making the nonforfeiture amount an accumulated value of the portion of premiums credited to the contract, reduced by a set of enumerated items such as previous partial surrenders, a fixed contract charge, any premium tax the company paid, and outstanding contract loans or indebtedness.
Insurers must accumulate both the crediting amounts and the permitted subtractions at the interest rate the statute prescribes.
Rather than leaving the interest assumption entirely to company practice, the bill links the rate to a public Treasury benchmark and limits how high the statutory rate can be; it also requires the contract to disclose whether and how that rate may be reset over time. For contracts that provide substantive participation in an equity index, the statute permits an insurance company to increase the reduction applied to the accumulated value to reflect the index‑related benefit, but only up to a measure tied to the market value of that benefit and subject to commissioner scrutiny.The department of insurance has explicit authority to issue regulations implementing the indexed‑benefit adjustments and to make other adjustments where justified.
Practically, that means insurers will need to implement recordkeeping and disclosure practices that support the accumulation math, specify redetermination mechanics in contract language, and be prepared to demonstrate to the commissioner how indexed features are valued relative to any additional reductions.
The Five Things You Need to Know
Applicability: The formula applies to contracts issued on or after January 1, 2006, and insurers may apply it, on a contract‑form‑by‑contract‑form basis, to contracts issued on or after January 1, 2004 and before January 1, 2006.
Net considerations: For each contract year, the statute treats net considerations as 87.5% of the gross considerations credited to the contract.
Permitted deduction: The statute allows an annual contract charge of fifty dollars ($50) to be treated as a deductable item and accumulated at the statutory interest rate.
Interest rule: The minimum nonforfeiture interest rate is the lesser of 3.00% per annum and a rate derived from the five‑year Constant Maturity Treasury (CMT) rounded to the nearest 0.05% and reduced by 125 basis points, with discrete minimum floors tied to contract issue date; the contract must state any reset basis and redetermination schedule.
Equity‑indexed adjustment: For contracts with substantive participation in an equity index benefit, an insurer may increase the reduction by up to an additional 100 basis points (1.00%), but only so long as the present value of that additional reduction does not exceed the market value of the indexed benefit and the commissioner can require proof or limit the allowance.
Section-by-Section Breakdown
Every bill we cover gets an analysis of its key sections.
Scope and retroactive application option
This subsection sets which contracts the statutory formula governs and gives insurers a narrow, form‑by‑form option to apply the rules to a limited set of older contracts. Practically, insurers must check contract issue dates and decide whether to adopt the new computation for older forms; regulators and compliance teams need to track which forms have been converted and ensure disclosures match the applied standard.
Which benefits use the nonforfeiture floor
This provision ties the formula to the minimum values required for paid‑up annuities, cash surrenders, and death benefits under related code sections. It operates as a cross‑reference: once the nonforfeiture amount is calculated under this section, that value is the floor used across the enumerated benefit calculations, so actuaries must feed the output into other reserve and benefit computations.
Structure of the accumulation and allowable subtractions
The statute defines the nonforfeiture amount as an accumulation of the contract's credited considerations up to the relevant time, reduced by an explicit list of subtractions including prior withdrawals/partial surrenders, a recurring contract charge, any state premium tax (subject to an exception if the tax is later credited back), and outstanding indebtedness. For operations, that means insurers must maintain clear, time‑stamped accounting of premiums, surrenders, charges, taxes, and loans so they can calculate accumulated values on demand.
Interest‑rate determination and redetermination
This subsection prescribes the interest rate mechanics: it ties the applicable rate to a public Treasury benchmark while imposing an upper cap and specifying that the contract must disclose the basis and timing for any resets. From an implementation standpoint, companies will need to document the chosen basis date or averaging period, program accumulation spreadsheets or systems to apply those rates, and build governance around rate redeterminations to ensure contract terms and regulatory filings align.
Treatment of equity‑indexed benefits and commissioner authority
These clauses allow insurers to widen the reduction applied to the accumulated nonforfeiture amount to reflect index‑linked features, but they condition that allowance on the additional reduction’s present value not exceeding the market value of the benefit. The commissioner can demand demonstrations, disallow or limit the addition, and issue implementing regulations. In practice, that creates a valuation gate: firms offering indexed crediting must maintain valuation models and be ready to substantiate how the extra reduction maps to benefit value.
This bill is one of many.
Codify tracks hundreds of bills on Finance across all five countries.
Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Annuity buyers and beneficiaries — they gain a clearer statutory floor for paid‑up and surrender values, which strengthens predictability of guaranteed minimums across covered contracts.
- Regulators (California Department of Insurance) — the bill centralizes calculation rules and grants explicit authority to require demonstrations and promulgate regulations, improving supervisory leverage and consistency.
- Actuaries and product teams — they receive a defined, uniform framework to price, reserve, and document nonforfeiture liabilities, reducing ambiguity about acceptable methods.
- Third‑party valuation and compliance consultants — demand for independent model validation, indexed‑benefit valuation, and regulatory support will increase as companies prepare demonstrations for the commissioner.
Who Bears the Cost
- Issuing insurers — they face potential higher minimum liabilities, increased reserve and capital needs, and operational costs to implement accumulation, redetermination, and disclosure processes.
- Smaller insurers and MGAs — fixed compliance tasks (systems updates, model documentation, filings) can be disproportionately expensive for entities with fewer annuity contracts.
- Companies offering equity‑indexed annuities — they must produce market‑value demonstrations for any additional nonforfeiture reduction, which may constrain product features or increase hedging/replication costs.
- State regulator resources — the department may need additional staff or technical expertise to review demonstrations, adjudicate contested valuations, and write implementing rules.
Key Issues
The Core Tension
The central dilemma is between consumer protection and product flexibility: the bill seeks to guarantee minimum annuity values using a standardized, market‑linked interest rule while preserving room for indexed product innovation by permitting additional reductions tied to index benefits—an arrangement that protects buyers from arbitrary assumptions but forces insurers to either absorb higher guaranteed costs or restrict product features and pricing.
The statute balances prescriptive computation mechanics with discretion for the insurance commissioner, but that balance raises implementation challenges. Tying the interest assumption to a public Treasury benchmark with statutory caps and floor rules stabilizes assumptions in many scenarios, but the exact choice of averaging period and redetermination timing (which the contract must disclose) can materially affect guaranteed values and creates operational complexity for insurers that reset rates frequently.
Valuing the 'market value' of equity‑indexed benefits is inherently model‑dependent, and the commissioner’s authority to require demonstrations opens the door to disputes over methodology, admissible scenarios, and calibration.
Optional retroactive application to certain older contracts creates a competitive and compliance wrinkle: insurers may selectively adopt the framework for historical forms, which could produce uneven guarantees across similar vintages and necessitate additional disclosure and systems work. Finally, the interaction between the allowed annual charge and accumulation mechanics—especially when interest assumptions are low—could produce outcomes where permitted deductions meaningfully erode consumer value, raising questions about proportionality and whether the statutory tradeoffs reflect evolving market realities.
Try it yourself.
Ask a question in plain English, or pick a topic below. Results in seconds.